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On Sep 19, we maintained our Neutral recommendation on CenturyLink Inc. (CTL - Analyst Report). The company is characterized by a reformed business structure, broadband expansion, faster fiber builds, better cloud computing services and penetration of Prism TV into new markets.

However, deteriorating legacy voice and access revenues due to wireless substitution remain significant risks to the carrier. The leading landline operator holds a Zacks Rank #3 (Hold).

Why Maintained?

CenturyLink has redesigned its operating segments to strengthen its grip over the market as well as remain fully committed to wholesale, hosting and consumer customers. Owing to its long-standing ties with clients by bundling of integrated services, launch of new and attractive services, consistent technology upgrades and infrastructure enhancement, the company has witnessed slower rate of revenue declines.

The landline carrier is continuing with its fiber-to-the-tower (FTTT) expansion, and remains on track to build 4,000 to 5,000 fiber towers in 2013. The fiber build will position the company for long-term growth and reduce the current revenue compression by early 2014.

CenturyLink is concentrating on expanding the business base of its subsidiary Savvis and has recently completed the acquisition of Platform-as-a-Service (PaaS) provider – AppFog Inc. The acquisition will augment the product portfolio of Savvis as AppFog’s high-quality Platform-as-a-Service offerings along with Savvis' industry-leading infrastructure base will likely create a secure and reliable network for developers.

Additionally, the company continues to focus on data centre expansion and plans to add 87,000 square feet of space within 2013 to generate higher revenues in collocation and managed hosting and cloud services.

However, the company’s core local phone business has slowed considerably due to consistent decline in access lines. Substitution of traditional wireline telephone services by wireless and other competitive offerings and lower long distance minutes of use are resulting in poor performances.

CenturyLink is facing problems in gaining market traction for Savvis products, as some of its large clients are building their own data centers, thus eliminating their exposure to Savvis. Additionally, integration of Qwest and Savvis operations with CenturyLink will increase operating costs going forward. Thus we maintain a cautious view on the company.

Other Stocks

Companies operating within the telecommunication sector that are worth taking note of include Hawaiian Telcom Holdco Inc. (HCOM - Snapshot Report), Shaw Communications Inc. (SJR - Analyst Report) and Telefonica (TEF - Analyst Report). All the stocks currently carry a Zacks Rank #2 (Buy).

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